S&L asset sale leaves taxpayers holding the bag

October 07, 1991|By Jeff Gerth | Jeff Gerth,New York Times News Service

WASHINGTON -- The first deal in the Bush administration's showcase program to sell billions of dollars of properties seized from failed savings and loan institutions is turning out to be far more generous for buyers and costly to taxpayers than was originally disclosed, according to government officials and documents.

In the proposed arrangement, the purchase would be made with government financing, and with no interest payments for seven years.

"This is a government-sponsored leveraged buyout that would make Michael Milken drool," complained Representative Jim Leach, R-Iowa, a member of the House Banking Committee.

Two government officials wrote a memo critical of the deal, saying the government stood to lose tens of millions of dollars. But the memo later was purged by their supervisors, who also punished the officials who wrote it.

The beneficiary is Patriot American Investors, a newly formed partnership of two Canadian and two U.S. businessmen, represented by a lobbyist with close ties to the Bush administration and to government officials who are supervising the sale.

During the summer, without public notice, the government took scores of commercial properties off the market and canceled or tried to cancel several multimillion-dollar sales contracts for hotels and office buildings that were to be sold at their appraised value, or nearly so, according to business executives and officials of the Resolution Trust Corp., which oversees the assets seized from failed savings and loans.

The agency's program of bulk sales is intended to unload hard-to-sell properties. The government's hope is to use strong properties and favorable financing terms as incentives to find buyers for weaker parcels.

Since each property is separately mortgaged, some could return to the government if the acquirers fail to meet payments.

The properties taken off the market were part of the Patriot deal, still being revised, that would let the investors buy a $500 million package of buildings -- sometimes for as little as 60 percent of appraised value -- with $400 million in government financing and no interest for seven years, government documents show.

That arrangement drew a complaint from Kenneth Halterman, the agency official appointed to manage one of the seized savings and loans near Houston, and from another regional official.

In a memo to the agency in Washington, these two officials said the government stood to lose tens of millions of dollars if it sold the properties under the Patriot agreement.

Senior agency officials in Washington have acknowledged that they purged the memo in which the complaint was made and punished the officials who wrote it.

The memo "didn't go through the chain of command" and "was not a sanctioned document," said Lamar C. Kelly Jr., the RTC's deputy executive director for real estate.

Suppression of the memo was "an invitation to corruption," Mr. Leach said.

Mr. Leach is one of the authors of the bill that created the RTC, and his views of how the agency should perform are widely respected by members of both parties.

But RTC officials said in interviews that they had done nothing wrong and were only trying to sell the properties quickly and efficiently.

The agency has sold more than half the $350 billion in assets it acquired. Most of these have been easier-to-sell assets like securities, home mortgages and other loans. It still has a huge inventory of real estate.

Mr. Kelly and Steve Katsanos, the agency's chief spokesman, acknowledged in interviews that the Patriot deal had involved delays, misstatements and suppression of internal criticism. But they called these matters insignificant.

Overall, Mr. Kelly said, the agency is ahead of schedule in its bulk-sales program. Private groups like Patriot, he added, are better able to manage difficult properties.

Six months ago, the agency decided to lower its prices for the real estate and agreed to negotiate privately the sales of large blocks of property.

The opportunity to participate in this program was not subject to open competitive bidding, but one week after it was begun the four investors formed Patriot American, the only private investment consortium formed to take advantage of the program that has actually made a deal.

Patriot's individual partners are John Daniels, who founded Cadillac Fairview, a large Canadian real estate developer; William Mack, whose Mack Organization develops office space in the New York area; George Mann, a Canadian businessman who heads a holding company that owns Lincoln Savings Bank in New York; and Paul Nussbaum, a New York real estate lawyer.

In an interview, Mr. Nussbaum described the deal as an "opportunity to make a reasonable profit" because "this is a good time to buy real estate." He added that it was "no sure thing" and that not one of the partners is "political."

Much of the current dispute involves sales contracts for buildings in Houston and New Orleans worth tens of millions of dollars together.

Mr. Kelly and other senior officials say they are still examining each piece of property for the Patriot deal to determine whether dTC each qualifies for inclusion in the package and how it will be priced.

For the first seven years, the loan is interest-free, and for the rest the investors will pay 9 percent.

For its part, the government will get 30 percent of any profits Patriot realizes in leasing or selling the property later. But if the building loses money and Patriot cannot pay back its loan, the building would be returned to the government.